Creative Destruction

15 August 2012

Wednesday


Joseph Schumpeter coined the phrase ‘creative destruction’ to describe the growth of a capitalist economy.

The phrase “creative destruction” is indissolubly linked to Joseph Schumpeter, who coined it. Schumpeter devotes a chapter of his masterpiece, Capitalism, Socialism, and Democracy, to “The Process of Creative Destruction.” It has been observed that Schumpeter’s work was neglected for decades until in the late twentieth century the role of the entrepreneur in economic growth began to be appreciated.

I would argue that half of Schumpeter’s famous phrase continues to be neglected today, since the focus on entrepreneurial activity has primarily taken the form of singing the praises of innovation and the virtues of start ups, without an equal appreciation of the importance of business failure, bankruptcy, and economic collapse, despite the very prominent role that all of these phenomena have in the world today. It has been said that capitalism without bankruptcy is like Christianity with Hell, and this comparison is telling, more telling than I think most people realize, because the doctrine of Hell is about as unpopular as the idea of bankruptcy.

What events in recent world history have been more important than, for example, the economic collapse of the Soviet Union, the dot com crash, the bankruptcy of Enron, or the bankruptcies of Lehman Brothers and Bear Stearns? There have been many events of roughly equal importance to these massive examples of the “destructive” phase of “creative destruction,” creative examples among these, but it would be difficult to name obviously more important events that these for shaping the world in which we live.

I think it is probably a little exhilarating for business types and economists to talk about the virtues of innovation, but the exclusive focus on innovation creates a kind of conceptual vacuum around its opposite number, but we are in as much need to innovative forms of business dissolution as for business innovation. The recent financial crisis and the consequent “great recession” (as it is now being called) focused a lot of attention on enterprises that were perceived to be “too big to fail.” That is to say, if very large institutions were allowed to fail catastrophically, the damage throughout the economy could be greater than that of keeping a failing business afloat. “Too big to fail” talk was also a constant accompaniment of many national crises, like that in Greece now, or the Argentine debt default more than ten years ago. I can easily imagine, in this spirit, someone arguing that the Soviet Union was “too big to fail.” In fact, I am certain that there are those who are argued that an engineered “soft landing” for the Soviet Union might have come at a lower human cost than that more or less catastrophic failure that the Soviet Union did indeed experience.

It is just as important for us to rid ourselves of what we no longer need as to innovate new products that are suddenly the thing that everyone needs. In my discussion of technological succession I emphasized that apparently exponential technological growth is often the result of several overlapping technologies succeeding each other in quick succession. This has certainly been the case with personal computers, as one generation of technology has rapidly succeeded another, and people have thrown out one computer after another as technology advances so quickly that the old computers are not merely inconvenient, but essentially useless.

There have been many news stories about computer waste, so if an individual wants to be informed about the process, the information is there for the taking. I recommend, rather than reading some news stories, watching the film Manufactured Landscapes, about the work of photographer Edward Burtynsky, in which you can see the painstaking work in a Chinese village of breaking up old computer parts, as well as the much larger scale but essentially parallel task of the ship breaking yards of Bangladesh.

It isn’t just individual objects like computers and ships that must be destroyed, or simply abandoned and allowed to sink into the landscape. In my post on Failed Cities I suggested that the process applies to entire cities as well:

“…industrial succession is part of the Industrial Revolution, and that the civilization that has emerged from industrialized societies is a civilization that must reckon with the industrial succession that comes with the Industrial Revolution. The rational approach to this would be to plan for cities to emerge around particular technologies, and for these same cities to be abandoned gradually as that same technology inevitably becomes obsolete.”

Ideally, the rational approach to obviously temporary supply chains would to build the facilities with the intention that they will be taken down and taken apart when this particular industrial process is succeeded by another industrial process. Unfortunately, civilization has not yet reached the point at which this level of planning and foresight can be integrated into large scale business operations.

In another sense, however, cities do in fact embody this idea — cities actually embody creative destruction — in the way that the build environment on the whole is always in flux. The same film I mentioned above in connection with computer waste disposal, Manufactured Landscapes, also features the ever-changing urban landscape of Shanghai.

Cities that have been continuously inhabited for long periods of time are inevitably built up and built over, sometimes intentionally destroyed no longer useful structures, and sometimes having existing structures destroyed by war or natural disasters. This is what makes cities so fascinating to archaeologists, since anywhere you dig is likely to reveal the history of the site in the layers below ground.

The city, then, considered from the perspective of the big picture and la longue durée, are or ought to be the model for the economy overall, which suggests that cities are the macroscopic model of rebuilding that needs to be realized on a microscopic level throughout the economy. We need an urbanism of objects to take control of our economic innovation and dissolution. Perhaps most macro-economic planning has been a failure in part due to the fact that it has not been conceived in this way.

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2 Responses to “Creative Destruction”

  1. YT said

    Nick,

    I’ve just read about Schumpeter only recently, he was quoted by the late Peter Ferdinand Drucker in one of his books.

    Thanks for this post for further illustrating the ideas of this economist.

    • geopolicraticus said

      Dear YT,

      Schumpeter is one of my intellectual heroes, and ya gotta love a guy who can say, “When I was a young man, I wanted to be three things: I wanted to be the world’s greatest horseman, the world’s greatest economist, and the world’s greatest lover. Unfortunately I never became the world’s greatest horseman.”

      Schumpeter, like Adam Smith, Karl Marx, and Pareto, was as much of a sociologist as an economist, which is to say that he placed economics in the context of social theory, which is exactly where it should be. It is impossible to understand economic behavior apart from the social factors and influence it.

      Thanks for reading,

      Nick

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